Commercial real estate -- including shopping centers, office buildings and industrial property -- will hit a low point in 2010 not seen since the Great Depression, according to a national survey of real estate executives.In Palo Alto, yogurt shops are said to be the rage, but no one seems to say anything about the biggest rage ever (well, at least here in Sacramento) - tattoo parlors!:
Values and rents will plunge, and vacancies and defaults will soar across all types of commercial property before the market rebounds slowly, according to the survey and forecast compiled by the Urban Land Institute and PricewaterhouseCoopers LLC.
"2010 looks like an unavoidable bloodbath for a multitude of borrowers, investors and lenders," the report said. "The shake-out period may extend several years as even some conservative owners with well-underwritten loans from the early 2000s see their equity destroyed."
The annual report, released Wednesday at a University of Michigan real estate conference, is the gloomiest in its 31-year history.
Metro Detroit and the Rust Belt fare the worst, according to the study based on a survey of 900 real estate executives.
Detroit ranked dead last among 50 major markets for anticipated commercial investment and development.
Michigan will "have lots of foreclosures," said Dennis Bernard of the Bernard Financial Group, the state's largest commercial mortgage banking firm. "We have so many foreclosures of downtown office buildings already.
"What will happen next year is many banks will take control of those buildings and sell them at very low prices. And then you will have many businesses go into those buildings," because of likely lower rent, said Bernard, who spoke at the Ann Arbor conference Wednesday.
The office vacancy rate in Metro Detroit is at 24.4 percent, according to Grubb & Ellis Co., a commercial real estate service firm.
The struggling auto industry is the main reason Metro Detroit fares the worst among all major markets. Says the report: "No one can sugarcoat how domestic manufacturers continue to relocate away from union-dominated areas in colder, northern interior locations and move to right-to-work, 'more business friendly' states in the Southeast."
By the end of next year, the study predicts commercial real estate values nationwide will have fallen an average of 40 percent from their peak in mid-2007. That eclipses the 1990s savings-and-loan crisis.
Researchers blame the ongoing credit squeeze and cautious consumers for the poor outlook. Banks that have been holding off on foreclosing or restructuring debt will start to do so as they build up reserve funds with government capital, respondents predicted. More than $250 billion in commercial mortgage debt will come due next year, followed by higher amounts in 2011 and 2012, said the report.
The report expects owners will have trouble refinancing their commercial properties because lenders are curtailing credit, and falling real estate values mean an increasing number of properties are worth less than the debt owed on them. More than 88 percent of U.S. survey participants expect lending standards to be "very stringent."
Strolling down University Avenue, shoppers can easily see there aren't as many places to shop as there were a year ago.
"For rent" signs seem to be multiplying like bunnies -- and staying up for months and months.
"There's a widely held perception that if the landlord weren't so greedy all the spaces would be leased," said Jonathan Goldman, senior vice president of Premier Properties Management, Palo Alto.
But Goldman, who's been in the business for 13 years, disagrees.
He points to the space vacated by Stanford Bookstore two years ago that sat and sat.
"We just leased it for significantly under the going rate," he said, noting that he's never seen rents advertised for under $3 to $4 a square foot.
"We could have taken a tenant a year ago for $2 but there were no tenants," he said.
...All told, about 16 percent of the 600,000 square feet of space is vacant in the downtown "core" zone, along University Avenue from Alma to Cowper streets, including the little side streets and parts of Lytton and Hamilton avenues, Goldman said.
That's of concern to Palo Alto officials. The city has an ordinance that states retail space can be rented out as office space when the vacancy rate exceeds 5 percent. But retail tends to draw shoppers to the business district.
...Goldman isn't advocating turning retail space into offices, but he is circumspect.
"If (office space) is the only thing that can survive, you need to do something. You don't want boarded up buildings in your neighborhood," he said.
"We're all scared -- landlords, tenants -- of University Avenue converting to office" because no one's going to shop at a store in the middle of a block of offices, he said.
Ultimately, he says landlords make more money from retail on University Avenue than office. But, "the reality is, it doesn't matter how cheap you make it, there are a lot of people who really can't afford to pay the rent," he said.
Goldman said vacancies sometimes occur because businesses become obsolete or marginalized.
"The Bead Shop is a perfect example," he said, noting that much of the bead business is conducted online today.
Pointing to downtown vacant storefronts, Goldman said, "Some were victims of the economy, others of a changing world. The problem is there's no new trend."
In 2001, it was nail salons and yoga studios.
"Other than yogurt, we're not seeing any growth industry. We're not seeing national retailers. It's been bleak," he said.